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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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How U.S. Sanctions Against Venezuela Backfired

Harsh U.S. sanctions, a crumbling economy, and near collapsed petroleum industry have done little, if anything, to loosen President Maduro’s grip on power in Venezuela. It appears that one of Latin America’s most reviled heads of state has not only outmaneuvered his domestic opponents but beaten U.S. sanctions designed to remove him from power. By December 2020, Maduro had taken control of Venezuela’s National Assembly, the only major state institution not controlled by the government and United Socialist Party of Venezuela (PSUV). In last year’s election, which was boycotted by most opposition candidates including Juan Guaidó, Maduro’s party won 256 out of the 277 seats available in the legislative body. This not only consolidated Maduros’ power over the crisis-ravaged Latin American nation but demonstrated that harsh U.S. sanctions are failing to remove him from power. Taking control of the National Assembly was particularly important for Maduro because the legislative body is required by Venezuela’s constitution to ratify international treaties and approve oil contracts with foreign energy companies. The law-making body has long been a thorn in Maduro’s side and the latest development essentially cements his control of Venezuela. This is an especially important development because it coincides with Maduro’s plans to revive Venezuela’s economically crucial oil industry by opening it up to foreign investment. In his annual accountability speech earlier this year Maduro stated that he planned to rebuild Venezuela’s shattered oil industry with the assistance of foreign partners and boost crude oil production to 1.5 million barrels daily. To achieve this, Maduro needed control of the National Assembly to gain approval for foreign investment in oil projects, which is currently capped at 49% with the remainder awarded to national oil company PDVSA. When coupled with Maduro’s anti-blockade law, which is intended to promote the free trade of strategic goods such as gasoline, it indicates that Venezuela is open for business and willing to accept foreign investment in its economically crucial hydrocarbon sector. By gaining control of the legislative body Maduro can remove the cap on foreign investment in oil projects and approve full ownership to international energy companies, making Venezuelan oil projects more attractive to foreign investors. Those outcomes have further sidelined opposition leader Juan Guaidó, who is internationally recognized as Venezuela’s legitimate interim president. By taking control of the National Assembly Maduro has effectively nullified Guaidó’s power base further fracturing his support and putting his claim to Venezuela’s presidency in question because he will no longer be the assembly speaker.

Related: Energy Commodities Rally: Oil Nears $60, Natural Gas Jumps Above $3

These are important developments for Maduro because Venezuela’s economically vital oil production fell to an average of 431,000 barrels daily during December 2020. The oil rich Latin American country is pumping crude at volumes not seen since the 1940s. The near collapse of Venezuela’s petroleum industry is responsible for the implosion of its economy, which has triggered one of the worst humanitarian crises since World War Two with 96% of Venezuelan’s now living in Poverty. This is an extraordinary development when it is considered that Venezuela was once the wealthiest country in Latin America and in 1950 the world’s fourth richest by capita. Even Maduro’s allies of convenience Russia, Cuba, China, and Iran have been unable to arrest the disintegration of Venezuela’s oil industry and prevent the country’s near economic collapse. Joint ventures between Russian state-controlled energy major Rosneft and PDVSA failed to prevent the oil industry’s catastrophic disintegration. This highlights that Venezuela needs to attract massive transfers of capital, technology and expertise if Caracas is to rebuild the economically vital oil industry to spur on economic recovery. Western oil majors such as Chevron, which has a century long history of operating in Venezuela, are best positioned to provide the necessary investment and resources. For that to transpire, Washington must ease sanctions against Venezuela, notably those which prevent Caracas from accessing global energy and financial markets as well as those blocking foreign companies from operating in the country. That could very well occur under a Biden administration. Biden has flagged that he will take a more diplomatic and humanitarian approach toward Venezuela which could include an easing of sanctions. Maduro’s ability to not only cling to power but strengthen his position despite a decaying economy, substantial internal opposition, international criticism and a severe humanitarian crisis indicates that U.S. sanctions have failed. Related: Fossil Fuels Aren’t Going Anywhere

The primary objective of Washington’s current policy toward Venezuela is to precipitate regime change. While it has effectively crippled Venezuela’s economy and petroleum industry, causing considerable suffering for every-day Venezuelans, it has only made Maduro’s regime more resilient. As modern history demonstrates, economic sanctions on their own usually fail to trigger regime change. Former U.S. Secretary of State George Shultz once described sanctions and punitive trade policy as a wasting asset that over time has less impact as the targeted people and organizations find alternatives to go around them. This is exactly what has happened in Venezuela. Maduro and his supporters found other sources of support, notably forming alliances with Russia, China, Cuba and Iran. Those countries have also provided financing in exchange for oil, military assistance and even facilitated the avoidance of U.S. sanctions.

The latest events demonstrate that Washington needs to take a different approach to deal with Venezuela, particularly when it is considered that growing Russian and Iranian influence has the potential to destabilize Latin America. A decision needs to be made soon because time is running out for Venezuela’s vast petroleum reserves. PDVSA’s rapidly corroding energy infrastructure, declining global demand for sour heavy crude oil, and the emergence of peak oil demand are causing the value of those crude oil reserves to deteriorate and could eventually see them become a stranded asset.

By Matthew Smith for Oilprice.com

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  • Mamdouh Salameh on February 08 2021 said:
    While sanctions enable the United States to project an image of itself as master of the world, they have become virtually useless as a tool of foreign policy. They, like tariffs on China, failed against Russia, Iran, Venezuela, Cuba and China. The United States continues with them because it doesn’t want to lose face and admit their failure.

    Back in December 2018 at a Doha Forum, Iran’s Foreign Minister, Mohammad Zarif, stated that: “If there is an art that we have perfected in Iran that we can teach to others for a price, it is the art of evading sanctions.” The Iranians taught Venezuela that art and got paid by Venezuelan gold.

    As a result, Venezuela continues to export its crude to the world using Iran’s tried-and-tested sanction-busting measures.

    In a nut shell, Venezuelan crude continues to reach the world with help from Russia and oil traders around the world. Exports far exceed the 431,000 barrels a day (b/d) which the author mentions since Venezuela won’t report to OPEC or anyone else the real volumes so as not to invite more sanctions.

    And contrary to the repeated claim by the author, help from China, Russia and Iran has enabled Venezuela keep its economy afloat and its national oil company and refineries producing working within the limitations of the sanctions.

    Not only did President Maduro beat US sanctions but has also taken control of Venezuela’s National Assembly in the December’s election. This is an especially important development because it coincides with Maduro’s plans to revive Venezuela’s economically crucial oil industry by opening it up to foreign investment.

    US oil supermajor Chevron could be earmarked for a major role in reviving Venezuela’s oil industry given its hundred years of fruitful association with the industry and the country.

    President Biden has now a chance to show a human face of capitalism rather than the ugly face former President Trump showed to the world and lift or ease sanctions on Venezuela as a humanitarian gesture to ease the suffering of the Venezuelan people and also to pave the way for a political solution to the crisis.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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